Pros and Cons of Unsecured Business Loans in the UK

by | Dec 9, 2019

When financing a start-up or small business, new business owners sometimes feel that the funding they need is out of reach if they don’t have the collateral to secure it. However, this isn’t always the case – unsecured business loans are an option for getting the capital you need without having to put up an asset as security. 

What is an unsecured business loan? 

When you take out an unsecured business loan, you won’t need to set the loan against assets as collateral. This means higher exposure or risk for the loan provider. For this reason, lenders may mitigate risk by lending smaller amounts over a shorter time. 

What is a secured business loan?

A secured business loan, on the other hand, gives the lender better security by using one of the business’ assets (such as machinery or property) as collateral in case the business owner fails to repay the loan. Should the borrower become unable to repay all of its debts, the lending institution will be the first to receive repayments over the secured asset. Generally speaking, a secured business loan may be more flexible in terms of repayment periods. A secured loan may also have a lower interest rate than an unsecured loan as the lender has some form of guarantee. 

Who can benefit from unsecured business loans? 

Some examples of businesses that can benefit from unsecured business loans include:

  • Seasonal businesses – Businesses that boom during certain times of the year and are quieter at other times may seek an unsecured loan to cover the gaps in working capital during the quieter months. Once business picks up again, they will pay the loan back. 
  • New businesses – Start-ups may not have sufficient assets to use as collateral.
  • New investment –  When businesses need to finance a change or asset to help them grow the business.

What will you need to take out an unsecured business loan?

Each lender’s requirements vary, but here are some of the things you may need to take out an unsecured business loan?

  • Your business’ turnover figures
  • A personal guarantee (a legal document that states that if you can’t pay back your loan, the lender will have legal rights to pursue your personal assets)
  • A legal loan document
  • A breakdown of your business assets, expenses, how much money you have in the bank and your plan for the money provided by the loan
  • Business plans, projections and financial forecasts 

The Pros of Unsecured Business Loans 

Free up your assets 

Since you haven’t used your assets as collateral, you can sell or replace them as you please without seeking permission from the lender. 

Fewer upfront costs 

Since there are no legal and valuation costs, the upfront costs of an unsecured business loan can be lower. 

No risk to personal or business assets 

Because a secured business loan is protected with specific assets, the lender is able to take control of these assets if you default. In the case of an unsecured business loan, the lender would have to go to court to secure an order to seize any assets.

Easier loan application process 

With an unsecured business loan, lenders don’t need to conduct external reviews to evaluate the collateral beforehand. Because the lending process is controlled by the lender, the overall process is faster and easier. 

Wider range of providers and products 

Because the loan process is easier with an unsecured business loan, this means that more providers are willing to offer them. Institutions can choose to take a higher interest rate in lieu of collateral. 

No need for collateral 

If your business or startup lacks valuable business assets to offer lenders as collateral, you will be ineligible for most secured business financing. With an unsecured loan on the other hand, there’s no collateral required. 

The Cons of Unsecured Business Loans 

Smaller loan amounts

Because of the increased risk, many lenders will only loan smaller amounts without security. If you need a larger loan for a major investment, you may need to put up some collateral to bring down the level of risk taken by the lender. 

Higher interest rates 

Because unsecured loans carry more risk for the lender, they tend to have higher interest rates. If you have collateral to utilise, it may be worth getting a secured loan to avoid high interest rates. 

Require a decent credit score 

If you don’t have a good credit score, you run the risk of having your loan application rejected by most financial institutions. Since you are not using collateral, your credit score is the only ‘security’ the lender has. It may still be possible to get an unsecured loan with an average credit score, but you may be liable for higher interest rates. 

Harder to qualify for a loan 

Your business is unlikely to qualify for an unsecured loan if your credit score, business plans, financial statements, cash flow etc. are not in order with the lender’s requirements. 

How to get an unsecured business loan 

Now that you have a better understanding of unsecured business loans, we hope you have a better idea of whether or not this is the right loan solution for your business. For help finding the best business loan for your needs, don’t hesitate to contact the team at Smarter Business. 

2024 Energy Market Volatility Strategy | Smarter Business

2024’s Forecasted Energy Price Increases and the Best Way To Save  Energy Market Volatility: Take The Power Back   Wholesale energy market volatility has seen an increase in prices, with projections showing fluctuations for the remainder of the year. With anticipated...

MOP DC/DA For Business Electricity | Smarter Business

Energy Spotlight: MOP DC/DA Contracts  What Are MOPs and DC/DA and Why Are They Important?  Effective metering and timely energy data hold extensive potential benefits for businesses. These include billing accuracy, effective energy efficiency strategies, and costs...

2024 Commercial Energy Price Forecast | Smarter Business UK

2024 Commercial Energy Price Predictions  For business owners, the question on everyone’s minds is, “Will energy prices fall in 2024?” At first glance, we appear to have started strong in 2024 – with a 12% reduction in the short-term energy price forecast according to...

2024 Business Energy, Gas, Water, Facilities Maintenance

Business Energy Tips for a Strong Start In 2024    Insights To Ensure Business Utilities Are New Year Ready  As we take our first steps into the new year, it is the perfect time to get everything in line to start 2024 on the right foot. Take the time to relook at...

2023 Winter Business Energy Savings

Quick Tips for Winter Energy Worries  How To Prevent Winter Energy Woes    As winter approaches, the cost of winter energy – at home and at work – is on everyone’s minds. It’s a good time to scrutinise energy consumption with savings in mind.  The domestic energy...